Post on 15-Jan-2016
Chapter 17
Externalities
and the Environment
© 2009 South-Western/ Cengage Learning
Externalities
• An externality is a cost or benefit associated with a transaction not borne by the decision maker– Full benefits and/or full costs not included
in market price
– Pollution • External cost
– Education• External benefit
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Optimal Level with negative externality
• External costs with fixed technology– Marginal social cost
• Marginal private cost• Marginal external cost
– Set MSC = MSB• Optimal Q* & P*
– Set MC = MB• Too much produced at too low a price
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Positive Externalities
• Education– Personal benefits– Benefits to society
• Set MSC = MSB– Optimal Q* and P*
• MC = MB– Too little consumed at too low a price
• Public policy– To increase quantity beyond private optimum
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Optimal Level with negative externality
• To achieve socially efficient production– Demand (marginal benefit) intersects
marginal social cost curve
– Government regulation• Limit production• Tax = marginal external cost
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Optimal Level with positive externality
• To achieve socially efficient production– Demand (marginal benefit) intersects
marginal social cost curve
– Government regulation• Subsidy = marginal external benefit
–Subsidize consumers–Subsidize producers
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Optimal Level of Pollution
• External costs with variable technology– Variable technology
• Reduce emissions: alter the production process
• Cleaner technology
– Production of cleaner air• Diminishing returns
– As air becomes cleaner it is harder to make cleaner still
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Optimal Level of Pollution
• Reducing greenhouse gases– Marginal social cost curve
• Marginal cost of enduring pollution• Upward-sloping
– Marginal social benefit curve• Marginal cost of reducing pollution• Downward-sloping
– Optimal level of air quality• Marginal social benefit = marginal social cost
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Optimal Level of Pollution
• Shift in marginal social cost curve– Technological breakthrough: Lower
marginal cost of cutting greenhouse gas• Downward shift of MSC curve• Lower optimal level of emissions
• Shift in marginal social benefit curve– Higher marginal benefit of reducing
emissions• Upward shift of MSB curve• Lower optimal level of emissions 9
Criticisms of Economic Analysis
• Measurement problems– Cost of enduring pollution
• Not all costs are easily quantified
– Cost of removing pollution• Technological
–More easily quantified
• Who has the right to clean environment?– World does not run by economic trade-
offs alone10
Optimal Level of Pollution
• The Coase theorem – Problems of externalities will be resolved
efficiently through private exchange, regardless of the assignment of property rights, so long as there are no transactions costs
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Optimal Level of Pollution
• Coase Theorem– Efficient solution
• Least cost solution • Assign property right to one party• One side bears the externality cost
– Transactions costs arise• Scientific and technical uncertainties • Legal uncertainties• Costs of negotiation
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How to Achieve Optimal Level of Pollution
• Command & Control– Engineering controls and pollution
ceilings• Not efficient
• Legal system– Tort law
• Difficulties arise
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How to Achieve Optimal Level of Pollution
• Pollution Charges– Efficiency can be achieved
– How large is tax?
– Polluters have “right” to pollute
• Market for pollution rights – Government sells pollution rights
• Limits maximum level of pollution per day
– Firms buy and sell pollution permits
– Value of pollution permits fluctuates14
Pollution Rights and Public Choice
• Pollution regulation– Special interest of polluters
• Before 1990– Command-and-control environmental
regulations• Particular technologies to reduce emissions
• Market for pollution rights– Economic efficiency approach
• Reduce emissions: Cost-effective15
Environmental Protection
• Environmental Protection Agency EPA• Clean air act of 1970• Clean water act of 1972• Resource conservation and recovery act
of 1976• Superfund law of 1980
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Air Pollution
• Atmosphere– Economic resource
– People value clean air; willing to pay more
• Smog– 40% from automobile emissions
– 40% from consumer products
– 15% from manufacturing
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Air Pollution
• Clean air act of 1970– 90% reduction in auto emissions
– By 1990, average emissions fell• Lead: 97%• Monoxide: 41%• Sulfur dioxide: 25%
• U.S. air quality: good• U.S. – major source of fossil-fuel carbon
dioxide emissions18
Water Pollution
• Sources– Sewage
– Chemicals
• Sewage– Dumped into waterways; no cleaning
• Negative externality
– Federal money: treatment plants
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Water Pollution
• Chemicals– 10% from point pollution
• Factories, industrial sites
– Two thirds – from nonpoint pollution• Agricultural pesticides and fertilizers
– In most states: pesticides have fouled some groundwater
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Hazardous Waste and the Superfund
• Before 1980– Firms
• Pay others to haul and dispose• Not responsible for cleaning
• Superfund law of 1980– Companies
• Pay others to haul and dispose• Pay for clean up
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Solid Waste:”Paper or Plastic?”
• U.S. households– 4 pounds of garbage per resident per day
• Mostly packaging
– 200 million tons per year
• 70% of garbage - landfills• Recycled: 15% of garbage
– 75% paper products
• 15% - incinerated – Trash-to-energy plants 22
Solid Waste:”Paper or Plastic?”
• 2 out of 3 aluminum cans: recycled• Returnable deposit laws
– Increase recycling
• Recycling: imposes environmental costs– Curbside recycling
• Trucks
– Newsprint• De-inked
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